Description

SEBI directs stock exchanges to adjust constituents and weights in existing non-benchmark indices (BANKEX, FINNIFTY, BANKNIFTY) to comply with new prudential norms for derivatives eligibility.

Summary

SEBI has issued implementation guidelines for eligibility criteria on existing non-benchmark indices (NBIs) having derivatives contracts. Stock exchanges must adjust constituents and weights in existing NBIs (BANKEX, FINNIFTY, BANKNIFTY) to comply with prudential norms introduced in SEBI circular dated May 29, 2025. BANKEX and FINNIFTY will be adjusted in a single tranche, while BANKNIFTY will undergo phased adjustment over four monthly tranches to ensure orderly rebalancing of tracking AUM.

Key Points

  • Minimum 14 constituents required for derivatives on non-benchmark indices
  • Top constituent weight must not exceed 20%
  • Combined weight of top three constituents must not exceed 45%
  • All constituents must follow descending weight structure
  • BANKEX (BSE) and FINNIFTY (NSE) will implement compliance in single tranche
  • BANKNIFTY (NSE) will implement compliance in four monthly tranches
  • Phased approach designed to minimize impact on passive funds tracking indices
  • Adjustments based on feedback from public consultation held August 18, 2025
  • Recommendations approved by Secondary Market Advisory Committee (SMAC)

Regulatory Changes

New Prudential Norms for Non-Benchmark Indices:

  1. Minimum Constituents: At least 14 constituents required
  2. Top Constituent Weight Cap: Maximum 20% weight for single constituent
  3. Top Three Combined Weight Cap: Maximum 45% combined weight for top three constituents
  4. Weight Structure: Descending weight structure mandatory (higher-ranked constituents must have higher weights)

Implementation Methodology:

Single Tranche Adjustment (BANKEX and FINNIFTY):

  • All constituent and weight adjustments implemented at once

Phased Adjustment (BANKNIFTY):

  • Four monthly tranches for compliance
  • New constituents added in Tranche 1
  • Top 3 constituents reach target weight by end of Tranche 4
  • Excess weight reduction distributed equally across remaining tranches
  • Inter-tranche weight re-evaluation before each adjustment

Example Calculation (BANKNIFTY):

  • If Rank 1 constituent has 28% weight with 20% target (8% reduction needed)
  • Tranche 1: Reduce by 2% (8% ÷ 4 tranches) to 26%
  • Before Tranche 2: Re-evaluate actual weight (e.g., if drifted to 25.5%)
  • Tranche 2: Adjust remaining excess (25.5% - 20% = 5.5%) by 1.83% (5.5% ÷ 3 remaining tranches)

Compliance Requirements

For Stock Exchanges:

  1. Undertake necessary constituent and weight adjustments in existing NBIs
  2. Ensure compliance with all four prudential norms specified
  3. For BANKEX and FINNIFTY: Implement adjustments in single tranche
  4. For BANKNIFTY: Implement phased adjustments over four monthly tranches
  5. Re-evaluate constituent weights before each tranche adjustment
  6. Distribute excess weight reductions equally across remaining tranches

Affected Indices:

  • BANKEX - Derivatives traded on BSE
  • FINNIFTY - Derivatives traded on NSE
  • BANKNIFTY - Derivatives traded on NSE

Important Dates

  • May 29, 2025: Original SEBI circular issued (SEBI/HO/MRD/TPD-1/P/CIR/2025/79)
  • August 18, 2025: Public consultation conducted
  • October 30, 2025: Implementation circular issued
  • Phased Implementation for BANKNIFTY: Four monthly tranches (specific dates not mentioned in circular)

Note: Stock exchanges were required to submit proposals within 30 days from May 29, 2025 circular issuance.

Impact Assessment

Market Impact:

High Impact on Derivative Markets:

  • Three major derivative indices affected (BANKEX, FINNIFTY, BANKNIFTY)
  • Constituent changes will affect derivative contract specifications
  • Weight adjustments may impact index volatility and pricing

Passive Fund Impact:

  • AUM tracking these indices will require rebalancing
  • Phased approach for BANKNIFTY minimizes disruption to tracking funds
  • Single tranche adjustment for BANKEX and FINNIFTY may require larger one-time rebalancing

Trading Impact:

  • Derivative contracts on these indices may see pricing adjustments
  • Option strikes and futures positioning may need recalibration
  • Four-month adjustment period for BANKNIFTY allows gradual market adaptation

Operational Impact:

  • Stock exchanges must implement index rebalancing systems
  • Market participants need to monitor monthly tranche adjustments for BANKNIFTY
  • Passive fund managers must plan rebalancing strategies
  • Inter-tranche price movements require dynamic weight recalculation

Regulatory Compliance:

  • Ensures derivatives on NBIs meet standardized risk parameters
  • Reduces concentration risk through weight caps
  • Improves index diversification with minimum constituent requirement
  • Descending weight structure ensures logical index construction

Impact Justification

Major regulatory change affecting three major derivative indices (BANKEX, FINNIFTY, BANKNIFTY) requiring constituent and weight adjustments, impacting passive funds and derivatives contracts with phased implementation